Billionaire hedge fund manager John Paulson has been severely criticized over the past few months for losing money on gold. But the truth is gold contributes to only 2 percent of Paulson & Co.’s portfolio. John Paulson is once again betting on the housing market, but this time on recovery instead of collapse, according to Paulson’s letter obtained by John Melloy of CNBC.

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Paulson said in the letter that Gold Funds, which represent just 2 percent of his hedge fund’s AUM, have been criticized over recent months, and detracted people’s attention from the performance of his other funds. His Recovery Fund is up 27 percent so far this year, the Advantage Plus fund has gained 8.3 percent in the first quarter, while Credit Opportunities fund rose 10.4 percent in the first three months of this year. Paulson Enhanced fund gained 11.6 percent while Paulson International was up 5.5 percent in the first quarter.

John Paulson and Three Mortgage Insurers

John Paulson’s biggest gains came from mortgage insurers including Radian Group Inc. (NYSE:RDN), Genworth Financial Inc. (NYSE:GNW), and MGIC Investment Corp (NYSE:MTG). He expects the housing recovery to gain momentum in the months ahead. According to Paulson & Co.’s latest 13-F filing, Paulson accumulated a new position in MGIC Investment Corp. (NYSE:MTG) by purchasing 17 million shares during the first quarter. Between January and March this year, he tripled his stake in Radian Group Inc. (NYSE:RDN) from 3.5 million shares to 11.5 million shares. Paulson also increased his stake in Genworth Financial Inc. (NYSE:GNW) from 3.9 million to 9 million shares.

John Paulson says mortgage insurers benefit only when homeowners can easily make regular payments and avoid the risk of foreclosures. The stocks of mortgage insurance firms have been depressed through 2012. But housing prices are recovering now. Paulson says Radian Group Inc. (NYSE:RDN) will be worth at least $20 by 2015. The stock is currently trading at around $13. Genworth Financial Inc. (NYSE:GNW) is up 56 percent this year so far as regulators approved it to restructure its mortgage insurance division. John Paulson says we will see considerable upside for mortgage insurers as housing continues to recover.

Paulson Creates New Real Estate Fund

That’s not all. John Paulson has gone one step further. This year he has created another real estate fund that will acquire raw land. This fund will see big gains only when housing inventory saturates and builders come to Paulson & Co. to buy that land.

Will this be John Paulson’s “The Greatest Trade Ever – Part II”? Only time will tell.